Shares in payments company Square rose as much as 5% on Friday after Deutsche Bank upgraded its stock to a buy from hold.
A Deutsche Bank analyst wrote in a note on Friday morning that Square’s business model—based largely on selling credit card readers that connect to mobile phones and tablets—is “underappreciated by the street.” Square is “currently at an important inflection point as it turns towards profitability while maintaining industry leading growth rates,” the analyst said.
In addition to credit card readers, Square provides merchants with software services such as invoicing, scheduling, and loans. The company went public a year ago at $9 per share during what remains a relatively slow market for tech IPOs.
Initially, Square’s shares fluctuated between $12 and $13.50. But over the summer of this year, its shares nose-dived to around $8 after disappointing earnings and concerns about the company’s lending business, Square Capital.
There is also concern about whether CEO Jack Dorsey, who also leads beleaguered social media company Twitter, will remain CEO of both companies.
But after a better than expected earnings report in its most recent quarter, Square’s shares have risen from their summer slump. Based on the positive Deutsche Bank note on Friday, they rose as much as 5% to $13.27 in mid-day trading.
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In its most recent earnings, Square’s losses narrowed to $32.3 million from $53.9 million in the same quarter a year ago. The investment bank also called attention to the company’s better than expected revenue growth over the previous quarters, especially in hardware and software services. Overall revenue jumped 32.2% to $439 million in the third quarter from $332.2 million a year earlier.
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Additionally, Square has been able to add to the number of larger merchants using its payments services. Square said the number of these merchants, defined as those with at least $125,000 in annual payments volume, grew 55% in the third quarter. They now represent nearly half of Square’s gross payment volume.
Deutsche Bank pointed to growth in Square’s lending business as a promising sign. In the third quarter, Square lent businesses $208 million, up 70% from the same quarter in 2015.
But Deutsche Bank also warns that Square faces considerable competition in payments from established companies like PayPal, and that it could depress growth. There’s also the possibility that Square will be unable to reach profitability because of other increased costs, such as sales and marketing expenses, according to the bank.
